Perit Industries has $150,000 to inves are: t. The company is trying to decide b

Question

Perit Industries has $150,000 to inves are: t. The company is trying to decide between two alternative uses of the funds. The alternatives Project A Project B Cost of equipment required Working capital investment required Annual cash inflows Salvage value of equipment in six years Life of the project $150,000 0 $150,000 24,000 37,000 $ 8,500 6 years 6 years The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries' discount rate is 15%. Click here to view Exhibit 138-1 and Exhibit 138-2.to determine the appropriate discount factorfs) using tables. Required: 1. Compute the net present value of Project A. (Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount.) 2. Compute the net present value of Project B. (Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount.) 3. Which investment alternative (if either) would you recommend that the company accept? 1. Net present value project A 2. Net present value project B 3. Which investment alternative (if either) would you recommend that the company accept?

Explanation / Answer

Ans 1 Annual Cash inflow $24,000 PVIFA (15%,6) 3.78448 PV of annual cash inflows A $90,827.52 Salvage value 8500 PVIF(15%,6) 0.43233 PV of Salvage value B 3674.805 PV of total cash inflows A+B $94,502.33 Less: initial investment 150000 NPV ($55,498) (taking upto five decimal as table not pri=ovided) ans 1 NPV ($55,498) ans 2 Annual Cash inflow $37,000 PVIFA (15%,6) 3.78448 PV of annual cash inflows A $140,025.76 Working capital 150000 PVIF(15%,6) 0.43233 PV of working capital B 64849.5 PV of total cash inflows A+B $204,875.26 Less: working capital 150000 NPV $54,875 (taking upto five decimal as table not pri=ovided) ans 2 NPV $54,875 ans 3 Alternative b is better as it has more NPV

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